At its July meeting, the RBA decided to leave the cash rate unchanged at 4.10%.
Rate increases are a reflection of economic conditions. Central banks raise and lower interest rates to stimulate economic growth and manage inflation. If inflation is high, they might raise rates to try to control it. If it’s low, they may lower rates to encourage consumers to spend and borrow money.
Throughout the COVID-19 era, very low interest rates have supported economies around the world. And the combined effect of low interest rates and government hardship payments proved very effective in stabilising the Australian economy.
Yet lately, supportive government spending and monetary measures have coincided with supply chain shocks, such as Russia’s invasion of Ukraine, lockdowns in China and COVID-19 related labour shortages. These have resulted in excess demand which can’t be met by supply and higher inflation.
At some point, central banks, including the RBA, needed to raise interest rates back to normal levels, but these shocks are pushing up rates faster than expected.
In recent years, low interest rates bolstered share and fixed interest markets. Now, these markets are adjusting to higher long-term interest rates.
Compared to long-term averages, the official cash rate is still very low. And although we expect rates will continue rising for the next 12 months, we don't expect rates to climb to the levels seen in the 1990s or immediately following the global financial crisis in 2008.